By John Richardson

NEITHER SIDE seems to want a war but at febrile times like this miscalculations could see the US and Iran in a full-scale conflict.

Iran might feel it has little more to lose. Its economy is suffering so badly from increased sanctions, especially as a result of the collapse in its oil and petrochemicals exports, that hardliners within Iran may believe that further disrupting oil and gas production across the Middle East will give their country leverage in any negotiations.

Whilst the hardliners might calculate that a further attack on Middle East oil and gas facilities wouldn’t lead to a full-scale war the risk, is, I said, that they miscalculate. A US military response to further Iranian attacks would also carry the risk of miscalculation. Would the response be weighted and conducted in exactly the right way?

The “further’” in the above sentence assumes, as is widely thought to be the case, that Iran was behind the 14 September drone and cruise missile attack on Saudi oil and gas facilities.

Closure of the Strait of Hormuz

Immediately after the attacks there was a 49% reduction in ethane supply to some of the Kingdom’s steam crackers and reports that repairs to natural gas-liquids production would take several months. Since then, though, the picture has improved considerably with ethane feedstock supply getting back towards normal.

But what if the Strait of Hormuz were to be closed-down? This is one of the ultimate weapons Iran seems to possess given its proximity to the Strait and its military presence there.

Recent incidents in the Straits and the Gulf are detailed in the map on the left of the above slide – from a new series of ICIS infographics.

The same infographics list all the petrochemicals capacities in the Middle East which would be affected by a shutdown of the Strait. What’s excluded is Saudi Arabian capacity on the Kingdom’s west coast – at Yanbu and PetroRabigh. Both these sites would continue to have access to global markets via the Red Sea.

Most of the capacity in Iran itself, and in Abu Dhabi Kuwait and Qatar, could be shut-in by a blockade of the Strait because of its location. Some output may, though, still find its way into export markets via road and rail.

The infographics also put the tonnes of Middle East capacity into the global context. The Middle East is responsible for 21% of global LLDPE capacity, 16% of ethylene glycols capacity, 16% of LDPE capacity and 14% of overall ethylene capacity. In the aromatics space, the Middle East accounts for 8% of global styrene capacity.

Breaking this down to the effect on PE exports

Now take a look at my guesstimate of the impact on actual PE exports from the Middle East, which you can see in the chart on the right-hand side of today’s slide. This makes use of the excellent data in our Supply & Demand Database.

The calculations take into account estimates of Saudi Arabian production on the east coast minus local demand and a small amount of polymers moved overland. The assumption is again that production on the west coast – at the Yanbu and PetroRabigh sites – would be unaffected.

Calculations also take into account Iranian production minus local demand and minus a substantial amount of PE moved overland to Turkey. Last year, Iran trucked an average of 5.8% of its total PE exports, across the three grades, to Turkey.

Abu Dhabi, Kuwait and Qatar production is on the Gulf and therefore heavily exposed to the Strait being closed. Here I took our estimates of production minus local demand (much smaller than Iran where local demand is big), and minus a small amount of polymers shipped overland.

The end-result would be a loss of 312,000 tonnes of total Middle East HDPE exports, 240,000 tonnes of LDPE and 370,000 tonnes of LLDPE, assuming that the waterway was completely shut for a month. This would account for between 8-14% of our assessments of global monthly production of HDPE, LDPE and LLDPE.

“Why a month?” you might ask. Why indeed. A closure of the Strait might last longer than that. Why not at the extreme six months? Then we would see Middle East HDPE exports fall by 1.9m tonnes, LDPE by 1.4m tonnes and LLDPE by 2.2m tonnes.

The damage wouldn’t end with the loss of Middle East petrochemicals exports. The loss of the exports would be just the tip of the iceberg.

“The Strait of Hormuz is the world’s most important oil chokepoint because of the large volumes of oil that flow through the Strait. In 2018, its daily oil flow averaged 21 million barrels per day, or the equivalent of about 21% of global petroleum liquids consumption,” writes the US Energy Information Administration in its latest review of the energy corridor’s importance.

With the fall in oil, naphtha and natural gas-liquids exports would come a fall in petrochemicals production outside the Middle East:

  • Many refinery-petrochemicals complexes and standalone steam crackers based on imported Middle East oil and naphtha would have to cut production.
  • Similarly affected would be propane dehydrogenation plants dependent on Middle East propane.
  • Condensate splitters, which convert Middle East condensates into light and heavy naphtha for petrochemicals production, would also struggle to operate.

Nobody would emerge as a winner

Petrochemicals buyers will view all of the above with alarm because of the potential disruption to their raw material supplies. This would cause huge and very costly disruptions up and down all the major global manufacturing value chains.

In theory, of course, ethane-based cracker-to-PE complexes outside the Middle East – in the US, Thailand, Malaysia, Europe and India – stand to benefit from a tighter global PE market.

But what would happen in practice would be radically different. Another major Middle East war, this time involving a militarily strong Iran (last time it involved a poorly armed Iraq), would have a hugely detrimental effect on the global economy.

Oil and petrochemicals prices would initially soar. But the demand destruction from higher fuels and other prices would be instant, as would be the sentiment effect from collapsing global stock markets as investors fled to the safety of cash.

The world can ill afford another Middle East war right now because it would occur at a time of severe trade tensions between the US and China and an underrated, under-reported and largely misunderstood structural and so long term slowdown in the Chinese economy. This slowdown cannot be reversed because it is do with an ageing population and unsustainable levels of debt.

This would be the perfect storm of adverse economic factors. And there would obviously be the tremendous human cost of another war in the Middle East. Let’s therefore hope that both sides reach a deal.

PREVIOUS POST

US petrochemicals export exposure grows at the wrong time in history

25/09/2019

As always, the views in this blog post are my own and do not reflect the views o...

Learn more
NEXT POST

China PE overstocking rises to more than 1m tonnes as exporters continue to flood the market

01/10/2019

By John Richardson CHINA is heading for another good year of PE demand growth wi...

Learn more
More posts
Global polyethylene oversupply, the highest in 19 years, hasn’t gone away
03/07/2020

By John Richardson BRENT crude futures surged by 80% during the second quarter and enjoyed their bes...

Read
China could be in complete polypropylene self-sufficiency by 2022
28/06/2020

By John Richardson SORRY to labour the point but this comes from a genuine concern for the readers o...

Read
Asian polyethylene price recovery faces multiple challenges
25/06/2020

By John Richardson THERE are reports of significant cuts in Middle East polyethylene (PE) operating ...

Read
China’s long-term ambition for paraxylene self-sufficiency seems close to being realised
21/06/2020

On Friday, I examined how China’s paraxylene (PX) net imports could fall to as little 8m tonne...

Read
China’s big declines in 2020 PX and PP imports: the impact on its major trading partners
18/06/2020

By John Richardson CHINA’S refineries and petrochemicals plants came roaring back to almost fu...

Read
Paraxylene demand collapses as higher China production threatens 6m tonne fall in imports
15/06/2020

By John Richardson DON’T SAY I didn’t tell you that a decline in stock markets would happen. The...

Read
Coronavirus will severely damage the developing world unless we take the right steps
12/06/2020

By John Richardson IT IS a fantastic achievement. “Over the last 25 years, more than a billion peo...

Read
Main Street versus Wall Street and the crisis in the developing world
10/06/2020

By John Richardson RISING equity and oil markets do not necessarily point to a V-shaped recovery. I ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more
X

Uncover exclusive industry upates from ICIS

Interested to uncover more articles related to this topic? Explore additional news, insights and intelligence, tailored to the markets you are interested in by accessing exclusive content from ICIS.com

DISCOVER MORE